Banks’ own modifications typically reduce monthly payments by half as much as those made in the government program, making homeowners twice as likely to fall behind again after a modification.

When San Diego homeowner Nancy Gordon finally received a letter from JPMorgan Chase Bank offering to modify her mortgage, she thought there must have been a typo. The letter said her monthly payment would jump $50 -- not exactly the help she needed. Chase said she did not qualify for a government-sponsored modification that would have lowered her payments by $600. Instead, Chase's own proprietary modification was the best offer. It was no typo.

The government's foreclosure relief program has resulted in few permanent modifications, but the Treasury Department says it has at least spurred banks to do their own loan adjustments. The government program has "transformed the way the mortgage servicing industry treats borrowers in distress," Phyllis Caldwell, a Treasury official, said in congressional testimony last week. The banks' in-house modifications have come to outnumber the government modifications by four to one.

But like Gordon, homeowners across the country are finding that the help banks offer outside of the government program is a small consolation prize.

How Are the Mortgages Modified?

Type of Modification

% of Gov't Mods

% of Bank Mods

Added past-due interest and other fees to the principal

98%

87%

Reduced the interest rate

93%

80%

Froze the interest rate

1%

4%

Extended the term of the loan

48%

48%

Reduced the principal

1%

4%

Deferred some principal to repay later

21%

3%

Note: Mortgages can be modified using more than one type of modification. Source: Analysis of Mortgage Metrics data from fourth quarter of 2009 through second quarter of 2010

A ProPublica analysis of regulators' data shows that, compared to modifications in the government program, banks' own modifications are less likely to reduce interest rates, less likely to defer principal and more likely to actually increase monthly payments. Homeowners frequently fear that the bank modifications may not provide enough help to prevent foreclosure, yet they feel like they have few other options.

The government pays banks incentives for modifications done via its program and has standards to make the adjustments more affordable for homeowners. But no such guidelines exist for modifications banks do on their own. Forty percent of homeowners rejected for the government program get proprietary modifications from their mortgage servicer, according to Treasury Department data.

To be sure, proprietary modifications have improved since the administration launched its program in the spring of 2009. Before that, more than half of proprietary modifications did not reduce monthly payments.

Experts say lowering monthly payments is essential for preventing homeowners from falling behind on their modified loans. And the banks' own modifications are still much worse on that front than government-sponsored modifications: Proprietary modifications typically reduce monthly payments by half as much as those made in the government program -- $300 as opposed to $600, on average -- making homeowners twice as likely to fall behind within six months of a modification, according to the only quarter where data is available to compare the two.

Take the case of Joseph James, a homeowner north of Los Angeles who wanted a modification when his income as an automotive consultant fell sharply and he faced increased expenses as the custodial parent of an autistic son. For 13 months, James paid Bank of America $1,000 as trial payments for a government modification, less than half of what he was paying before. In March, the bank sent him a letter approving his permanent government modification but never sent the final paperwork. Eventually the bank told James that his only option was a proprietary modification that was $600 a month higher than a government modification.

Bank of America spokeswoman Jumana Bauwens said the approval letter was an "error," and the bank is reevaluating his proprietary modification to see if it can offer James a more affordable payment.

How Much Are the Mortgages Modified?

Change in Monthly Payment

% of Gov't Mods

% of Bank Mods

Reduced by 20 percent or more

79%

38%

Reduced between 10 and 20 percent

12%

21%

Reduced by less than 10 percent

8%

22%

Stayed the same

1%

4%

Increased

0%

15%

Source: Analysis of Mortgage Metrics data from fourth quarter of 2009 through second quarter of 2010

ProPublica's analysis found that almost 80 percent of the government modifications reduced monthly payments by more than 20 percent, whereas fewer than 40 percent of proprietary modifications made such reductions. Fifteen percent of proprietary modifications actually increase the monthly payments, typically because the modifications added past-due interest and other fees to the loan's principal.

Wells Fargo spokeswoman Teri Schrettenbrunner said the difference between its proprietary and government modifications is justified. "The only people who don't end up getting payment reductions are people who quite frankly don't need them or that we can't do a mod for at the end of the day that matches with what investor expectations are," she told ProPublica.

Homeowners tell ProPublica that they feel backed into a corner with few options aside from taking an in-house modification, even if it doesn't make financial sense. As ProPublica has reported, the government program can leave homeowners worse off if they're ultimately rejected. That's because homeowners make monthly trial payments and then, if they're booted from the program, often find their banks slap them with a bill to pay back the money they saved during the trial. Banks frequently give homeowners just one way to avoid immediately paying up: Take one of their proprietary modifications.

Connecticut homeowner Connie Breault, for example, said she was current on her loan before Chase told her she needed to miss a payment to qualify for a modification. After more than a year of making trial payments, Breault was denied a government modification and suddenly owed $13,000 to cover the difference between her full mortgage and the reduced payments she had made during the trial. The modification Chase offered Breault would end up costing an extra $40,000 over the life of her loan and only trimmed $100 off her monthly payment. The bank's modification barely dropped her interest rate down to 7.648 percent and added a $165,000 balloon payment at the end of her loan.

When Breault questioned the modification, especially its large balloon payment, she says an employee in Chase's executive office -- echoing the housing bubble's logic -- told her, "Why don't you just accept what we offered you, and you can refinance in a few years?"

Breault declined the modification offer and is working with an attorney to consider what options she may have. Chase did not respond to ProPublica's request to comment on the matter.

James, the homeowner near Los Angeles, says he took the modification because he felt he was put in a "take it or leave it situation," and he couldn't risk a foreclosure that would force him and his autistic son to move away from a local special-needs school. But he says the bank's modification is still not "affordable," and he fears redefaulting on the loan.

James is still holding out hope that Bank of America will make good on the letter in which they approved him for a government modification. He's been raising such a fuss, including contacting the special inspector general for the bailout, that he said the bank recently promised to honor the initial letter. "I have hopes that somewhere down the line I can get what I was told I would be getting," he said -- a government modification.

Correction, Nov. 5, 2010: This post incorrectly stated that homeowner Connie Breault had filed for bankruptcy. Breault has considered bankruptcy but has not filed.

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